Question

Refer to Figure 6.1b and assume that the price is fixed at $37,000 and that Buzzer Auto needs 5 workers for every 1 automobile produced. If demand is DM and Buzzer wants to perfectly match its output and sales, how many cars will Buzzer produce, and how many workers will it hire? If, instead, demand unexpectedly falls from DM to DL, how many fewer cars will Buzzer sell? How many fewer workers will it need if it decides to match production to these lower sales?

Short answer

If the demand is D_M, Buzzer Auto will produce 900 cars and hire 4500 workers.

If demand falls from D_M to D_L, Buzzer Auto will sell 200 fewer cars.

It will need 1000 fewer workers if it decides to match production to these lower sales.

Step-by-step solution

Sales and workers at DM demand curve

At a fixed price of $37,000, the output and sales match 900 cars on the demand curve D_M. Therefore, Buzzer Auto will produce 900 cars.

As 1 car requires 5 workers to produce, 900 cars will require 4500 workers (=900 × 5). Thus, Buzzer Auto will hire 4500 workers.

Sales and workers at lower demand curve DL

If the demand unexpectedly falls from D_M to D_L, the output and sales match 700 cars on the said curve. So, the Buzzer Auto will sell 200 fewer cars (=900-700).

For 700 cars, the Buzzer Auto will require 3500 workers (=700 × 5).

Therefore, it will hire 1000 fewer workers (=4500-3500).